HISTORY LESSON

IN DEPTH
By Arumugam Seetharaman and Ramaiyer Subramanian, Multimedia University

With investors demanding instant access to corporate information, internet financial reporting can be a powerful tool for building shareholder value. But issues of trust and reliability still loom large.

NavigatiNg the web of fiNaNcial reportiNg

wo trends are combining to change the nature of financial reporting in the modern world. First, technology, particularly the internet, has altered the way that information is presented and communicated. Traders, stakeholders, institutions, analysts, agencies, governments and regulators alike all use the data available online as they go about their daily business. We are shifting from a form-centric business culture to a data-centric one. Second, businesses now depend heavily on global capital markets. Financial reporting plays a vital role in communicating a companys economic performance. The Financial Accounting Standards

Board has identified three main objectives of financial reporting. The first is to provide financial data to assist both internal and external users in decision-making. The second is to make that information understandable and usable. The third is to provide related information on the companys economic resources and changes in those resources.

Illustration: Tim Ellis

EBF issue 23, winter 2005/6

51

Navigating the web of financial reporting

Financial reports or annual reports are published periodically by companies as documents of their financial results over a particular period of time. They can have a dramatic impact on portfolio managers investment choices. Disclosing annual report information on websites became popular between 1999 and 2001 (Davis et al, 2002), offering a more flexible approach to printed reports, which dont always meet the needs of all users. There is also the growing need for information to be provided much more quickly than the traditional annual report format allows. According to Alan Anderson, former senior vicepresident of member and public interest at the American Institute of Certified Public Accountants (AICPA), the business-reporting model of the future lies in on-time and real-time disclosure. Almost every company now has an internet presence. Companies use websites to provide more and more information to customers and shareholders and websites have no boundaries. The explosion of the internet is not only changing the way companies conduct their business but also promises to forever alter the way they communicate business performance. With investors demanding instantaneous access to corporate disclosure, and regulators pressing for more openness and transparency, effective internet reporting will be key to building shareholder value in the future. John Connors, former chief financial officer of Microsoft, one of the worlds largest companies by market value, has commented that the chief financial officer in 2010 will play a very different role than today. People will have access to information in ways they did not have in the past, and this will change not only the message but also the messenger. Today, Microsoft provides financial statements in the languages and the currencies of each country, and each is prepared in accordance with that countrys accounting standards. In the future, everyone will speak the same financial language. Any change in communication systems has huge implications and poses great challenges to corporations, regulators and accountants. One of the most important challenges concerns the quality of information being presented on corporate websites. No proper guidelines have been issued by regulators. Different disclosure practices are being followed, ranging from reporting a complete set of financial information to summaries of selected information, sometimes with vital information being omitted, without any consideration for best practice or for the needs of users.

a growing trend
The internet as a communication tool originated in the sixties in the US, particularly in the defence establishment. Internet growth was subsequently slow and usage was limited. It was not until the development of the worldwide web that businesses began using the medium to disseminate information about business activities, including financial and accounting information. Indeed, 99 per cent of Fortune 500 companies in the US now disseminate business information, including financial data, on their websites. Internet financial reporting can be a powerful tool in the hands of companies. According to a Business Reporting Research Project (BRRP) working group in 2000, the potential benefits of providing financial information on the internet can include: supplementing traditional disclosure; reducing the cost and time of distribution; improving and increasing the type of information disclosed; and boundaryless communication with a wide audience. Accounting bodies including the International Accounting Standards Committee (IASC), the Canadian Institute of Chartered Accountants (CICA), and the US Financial Accounting Standards Board (FASB) have also realised the importance of the internet as a tool for the dissemination of financial information. The dramatic increase in the disclosure of financial information through websites in recent times has been noted by several studies (Davis et al, 2002; Lymer et al, 1999). This has

IN BRIEF

IN BRIEF

IN BRIEF

IN DEPTH

IN BRIEF and most large companies now disclose at least some

financial information on their websites.

Internet financial reporting is growing in popularity,

The quality of such reporting, however, is inconsistent,

with many companies merely reproducing printed annual reports in electronic form. To get the real advantages of internet financial reporting, companies need to learn to disclose information in a flexible and timely manner, providing maximum benefit to users. Trust remains a major problem, as there is currently no standardisation or regulation of financial and nonfinancial reporting on the internet.

52

issue 23, winter 2005/6 EBF

Studies have shown that US companies are much better at managing investor relations via the internet than their counterparts in the UK and Germany
put pressure on parties in the financial reporting supply chain (Coffin, 2001) to come up with better methods of presentation and disclosure. Louwers et al (1998) have noted how the information provided by most companies on their websites simply duplicates what is already available in hard copy. The quality of online financial reporting varies from country to country, and also according to the size of the disclosing company. Studies have shown that US companies are much better at managing investor relations via the internet than their counterparts in the UK and Germany. In one survey, 99 out of 125 (79.2 per cent) US companies made information available through their websites on the same day as announcements in the press. A study in Spain found that the reporting practices of small and medium-sized enterprises differ significantly from those of large companies. At present, there is considerable variation in practice. Even though internet financial reporting can provide many benefits, not least in reducing the cost to firms of information dissemination, it seems that new and better methods of disclosure will be adopted voluntarily only if companies perceive that the benefits outweigh the costs. as those that govern disclosure through printed media. The International Accounting Standards require presentation of financial statements in a way that ensures comparability, classification, disclosure of extraordinary items and presentation of cash-flow statements, changes in equity and other components. Information can be broadly classified into financial and non-financial information. However, financial information on the internet can range from full annual reports to partly disclosed reports. Non-financial information can include any items such as profiles of the board of directors and the management team, lists of substantial shareholders, corporate governance information, audit committee reports, statements of internal control and the chairmans statement. How and what information is provided is at the discretion of the disclosing companies.

the implications
Internet financial reporting should encourage more progressive and innovative corporate reporting. By using the internet creatively, companies can distribute information concerning liquidity, profitability, solvency, working or operating results, marketing, taxation, corporate social responsibility programmes and much more. Financial data can be combined with other relevant non-financial information to allow rapid evaluation of corporate performance. Information can be provided in a clear, reliable and timely manner, and can provide forward-looking information and forecasts as well as historical information. Customers, shareholders, financiers, analysts, suppliers and government agencies will all stand to benefit and so too will companies themselves. We come back, however, to the problem of regulation and standardisation. Information disseminated on websites is not regulated by any professional body or government agency. The quality and the content of internet financial reporting therefore varies enormously from company to company. All disclosure in this form is entirely voluntary. Some companies

Dimensions of internet financial reporting

The IASC divides internet financial reporting into three stages: 1. Companies use the internet solely as another distribution channel for data contained in existing printed financial reports. 2. Next, they start to disclose their information in a form with which browsers and search engines can readily interact. 3. Corporations then begin to provide enhanced or expanded information in a cost-effective manner. Some disclosure is, of course, required by law. Statutory disclosure mainly deals with the requirements by local and national statutes and regulatory authorities, the Generally Accepted Accounting Principles (GAAP) and Security Commission regulations. Beyond these requirements, there is also non-statutory disclosure information that is not required by any statutes and/or any other regulations. Non-statutory disclosure information concerns matters of importance to companies and data that is useful to investors in helping them to judge the present and future performance of the company. It is in the provision and distribution of non-statutory information that internet financial reporting has seen the greatest growth. At present, the rules the govern the disclosure of financial and accounting information are basically the same

EBF issue 23, winter 2005/6

53

Navigating the web of financial reporting

recommendations
As companies change their methods of reporting from printed reports to web-based disclosure, it is essential that information should be disclosed in a timely manner and in a way that is useful to decision makers. Above all, it is essential that the internal and external public integrity and honesty of the company be maintained. If the report includes partial financial statements or summary financial highlights rather than full financial data, for example, management should incorporate a cautionary note to this effect on the website: readers must be aware not only of what is being disclosed, but of the existence of other information that has not be disclosed. Every business should have an internet reporting policy, which should determine the content, format, timing and authenticity of the information disseminated. Accurate and timely information allows organisations to gain and maintain competitive advantage. Confusion and errors have resulted from a lack of standardised definitions and formats for financial information. The introduction of XBRL will make documents more easily accessible and understandable, and will facilitate easy transfer to other formats and applications. It should also reduce the cost of dissemination and increase the efficiency. Now, of course, it is up to the international accounting regulatory bodies and government agencies to develop and issue the necessary guidance to companies and to make that guidance public so that users can identify the usefulness and reliability of internet financial information. Arumugam Seetharaman is associate professor of management and financial reporting at Multimedia University, Kuala Lumpur. Ramaiyer Subramanian is a lecturer in business and law at Multimedia University and former chairman of the Bangalore Branch of the Institute of Chartered Accountants of India. refereNces

police their own websites carefully and update them, while other companies leave their websites to turn stale. The result is that unreliable, unwarranted and unauthorised financial information may be disseminated on a companys website. This harms not only the company but the entire practice of internet financial reporting, as shareholders and analysts will then question the relevance and reliability of information disclosed on corporate websites in general. No international professional body has yet produced formal standards for internet financial reporting. It is extremely important that professional bodies and regulators act now to develop better policies, regulatory frameworks and standards. One standard that can and should be adopted is Extensible Business Reporting Language (XBRL), a computer language that has the power to integrate a fragmented supply chain around a single reporting and control programme. XBRL is increasingly being used by companies around the world. Its use in internet financial reporting would allow companies to close their books or accounts at any time, and then report their performance instantly. The use of a standard reporting language ensures comparability across many dimensions. It provides a framework for preparing, publishing, extracting and exchanging financial information. It also reduces the cost of preparing and duplicating data-entry operations and report generation. XBRL offers companies the benefits of internet financial reporting in terms of cost savings, flexibility and effective communication with stakeholders, and also offers those stakeholders the ability to compare data sets and make more effective decisions.

Coffin, Z (2000) Digital Reporting: Why Every Company is a Digital Media Company Davis, C E, Keuer, W P and Clements, C (2002) Web-Based Reporting: A Vision for the Future, CPA Journal, November, pages 24-36. Louwers, T J, Pasewark, W R and Typpo, E J (1998) Silicon Valley Meets Norwalk: Financial Accounting and the Internet, Journal of Accountancy, vol 186, no 2, pages 20-26. Lymer, A, Debreceny, R, Gray, G L and Rahman, A (1999) Business Reporting on the Internet: A Report Prepared for the International Accounting Standards Committee, www.iasc.org.uk

54

issue 23, winter 2005/6 EBF